Friday, July 2, 2010

Yesterday, Lisa discussed the importance of VCSELs in data center networks. One challenge for investors is that the devices sell for 20-30% gross margins, not unlike most other optical components. However, VCSEL drivers, the chips that tell the lasers what to do, can sell for much higher margins.

Manufacturers of the drivers include Analog Devices, Linear Technology, and over-the-counter stock GigOptix, which announced a follow on offering yesterday. These companies all have gross margins above 50%, although micro-cap GigOptix has experienced significant margin and revenue growth rate volatility as it has grown from $3 million in sales in 2007 to $14 million last year. In addition to these public names, privately-held Inphi is designing analog chips just for 40/100 Gigabit networks and data centers.

Overall, analog and mixed-signal semis are an overlooked component of data center technologies, but are necessary with all the short-reach copper and fiber links. As data center networks continue to expand, investors will benefit from finding these niche opportunities, and not always focusing on the well-known REITs and Collocation providers.